The Saudi Arabian Economy

The Saudi Arabian Economy

Policies, Achievements, and Challenges

Second Edition

Mohamed A. Ramady

King Fahd University of Petroleum & Minerals

123

Mohamed A. RamadyDepartment of Finance

and EconomicsKing Fahd University

of Petroleum and MineralsDhahran 31261, Saudi Arabiaramadyma@kfupm.edu.sa

ISBN 978-1-4419-5986-7 e-ISBN 978-1-4419-5987-4DOI 10.1007/978-1-4419-5987-4Springer New York Dordrecht Heidelberg London

Library of Congress Control Number: 2010930268

© Springer Science+Business Media, LLC 2005, 2010All rights reserved. This work may not be translated or copied in whole or in part without the writtenpermission of the publisher (Springer Science+Business Media, LLC, 233 Spring Street, New York,NY 10013, USA), except for brief excerpts in connection with reviews or scholarly analysis. Use inconnection with any form of information storage and retrieval, electronic adaptation, computer software,or by similar or dissimilar methodology now known or hereafter developed is forbidden.The use in this publication of trade names, trademarks, service marks, and similar terms, even if they arenot identified as such, is not to be taken as an expression of opinion as to whether or not they are subjectto proprietary rights.

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Springer is part of Springer Science+Business Media (www.springer.com)

Your old men shall dream dreams: your young men shall see visions

Dedicated to my children Ali, Faisal and Laylaand all the young men and women of the Arabworld

Contents

Part I The Setting

1 Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3Setting the Stage . . . . . . . . . . . . . . . . . . . . . . . . . . . 4The Financial Sector . . . . . . . . . . . . . . . . . . . . . . . . . 5The Heart of the Kingdom: The Hydrocarbon Sector . . . . . . . . 6The Foreign Sector . . . . . . . . . . . . . . . . . . . . . . . . . . 8Meeting Future Challenges . . . . . . . . . . . . . . . . . . . . . . 9Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Part II The Development Process

2 Reforms and Economic Planning . . . . . . . . . . . . . . . . . . 15Difficult Decisions Being Taken . . . . . . . . . . . . . . . . . . . 15Economic Diversification Remains Critical . . . . . . . . . . . . . . 15

Reforms at Centre Stage . . . . . . . . . . . . . . . . . . . . . . 16Transforming the Judicial System . . . . . . . . . . . . . . . . . 18

National Economic Planning: The Framework . . . . . . . . . . . . 18Strategic Choices . . . . . . . . . . . . . . . . . . . . . . . . . . 20

The History of Saudi Planning . . . . . . . . . . . . . . . . . . . . 21Plan Achievements . . . . . . . . . . . . . . . . . . . . . . . . . 23

The Performance of the Saudi Economy . . . . . . . . . . . . . . . 27Economic Diversification: Realities . . . . . . . . . . . . . . . . . . 29Composition of Saudi GDP . . . . . . . . . . . . . . . . . . . . . . 32The Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . . . 38Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 41

3 Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43The Budget – A Barometer of the Nation’s Health . . . . . . . . . . 43Oil Wealth versus Oil Poverty . . . . . . . . . . . . . . . . . . . . . 45Saudi Windfall Gains and Losses . . . . . . . . . . . . . . . . . . . 47

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Overdependence on Oil versus Building True Wealth . . . . . . . . 48The Saudi Budgetary System: Signals versus Reality . . . . . . . . 50

Budget Sectoral Allocations: Government Intentions Are Revealed 52Capital Expenditure Assumes More Importance . . . . . . . . . . 53Limited Sources of Income Is Key Constraint . . . . . . . . . . . 54Income Diversification Is Not Easy . . . . . . . . . . . . . . . . 57Despite Lower Oil Price, Bumper Expenditure Continues . . . . . 60

Financing Budget Deficits: Cyclical or Structural Deficits? . . . . . 61Burden of Indebtedness and Debt-Led Growth . . . . . . . . . . . . 63“Crowding Out” the Private Sector . . . . . . . . . . . . . . . . . . 65Facing the Challenges: Short- and Long-Term Solutions . . . . . . . 67The Time for Rhetoric Is Over . . . . . . . . . . . . . . . . . . . . 69Hopeful Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 71

Part III The Financial Sector

4 Saudi Arabian Monetary Agency (SAMA) and Monetary Policy 75Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 75Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75Asserting Independence . . . . . . . . . . . . . . . . . . . . . . . . 76SAMA’s Stated Functions . . . . . . . . . . . . . . . . . . . . . . 78SAMA’s Evolving Responsibilities . . . . . . . . . . . . . . . . . . 79Central Bank Monetary Policy . . . . . . . . . . . . . . . . . . . . 81

Structure of the Saudi Financial System . . . . . . . . . . . . . . 82Central Bank Monetary Policy: The Theory . . . . . . . . . . . . 83Saudi Monetary Policy in Practice . . . . . . . . . . . . . . . . . 84The Centrality of SAMA’s Exchange Rate Policy . . . . . . . . . 87

Saudi Banks Have Ample Reserves . . . . . . . . . . . . . . . . . . 90Reliance on “Open-Market” Operations . . . . . . . . . . . . . . . 91Money Supply Creation and Monetary Policy . . . . . . . . . . . . 93Composition of Saudi Arabia’s Money Supply . . . . . . . . . . . . 96Financial Deepening of the Saudi Economy . . . . . . . . . . . . . 97SAMA and Inflation Control Policies . . . . . . . . . . . . . . . . . 98The Economic and Social Impact of Inflation . . . . . . . . . . . . 101Managing the Kingdom’s Reserves . . . . . . . . . . . . . . . . . . 103Future Development and Challenges . . . . . . . . . . . . . . . . . 105Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 108

5 The Financial Markets . . . . . . . . . . . . . . . . . . . . . . . 111Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 111Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111The Saudi Banking Sector . . . . . . . . . . . . . . . . . . . . . . 112SAMA and Bank Supervision . . . . . . . . . . . . . . . . . . . . . 114

The Early Years (1940s–1960s): Infancy Period . . . . . . . . . . 115The 1970s: The Adolescence Period . . . . . . . . . . . . . . . . 116

Contents ix

Coming of Age in the 1980s: Young Adulthood . . . . . . . . . . 117The 1990s and the Period of Maturity . . . . . . . . . . . . . . . 1182000 Onwards . . . . . . . . . . . . . . . . . . . . . . . . . . . 119

Saudi Bank Shareholder Concentration and Ownership . . . . . . . 121Performance of the Saudi Banks . . . . . . . . . . . . . . . . . . . 123Concentration Ratios Are Worrying for Competition . . . . . . . . . 126The Rush to Segmentation . . . . . . . . . . . . . . . . . . . . . . 127Saudi Banks’ Lending Profile . . . . . . . . . . . . . . . . . . . . . 130Asset-Liability Management Is a Problem . . . . . . . . . . . . . . 132Saudi Banks Sectoral Lending: Consumer Lending Takes Off . . . . 134The Emergence of the Insurance Sector . . . . . . . . . . . . . . . 136Foreign Participation in the Insurance Sector . . . . . . . . . . . . . 139Islamic Finance in the Kingdom . . . . . . . . . . . . . . . . . . . 140Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 142

6 The Saudi Capital Market . . . . . . . . . . . . . . . . . . . . . . 145Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 145Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145Establishing a National Stock Market Carries with It Risksand Responsibilities . . . . . . . . . . . . . . . . . . . . . . . . . . 146Saudi Capital Market Developments: A Historical Perspective . . . 146Saudi Capital Market Operation . . . . . . . . . . . . . . . . . . . 147The New Capital Market Law . . . . . . . . . . . . . . . . . . . . . 149Organization Structure and Operations of the CMA . . . . . . . . . 152Regulatory Supervision and Inherent Biases . . . . . . . . . . . . . 157The Saudi Capital Market: Arab World’s Largest . . . . . . . . . . . 158Free Share Float Is an Issue . . . . . . . . . . . . . . . . . . . . . . 161Saudi Capital Market Performance . . . . . . . . . . . . . . . . . . 162Sectoral Performance of the Saudi Market . . . . . . . . . . . . . . 164Investor Behaviour: Irrational Exuberance and Herd Mentality . . . 165Boosting Foreign Participation . . . . . . . . . . . . . . . . . . . . 169Saudi Mutual Fund Market Growth . . . . . . . . . . . . . . . . . . 171Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 176

Part IV The Domestic Sector

7 The Private Sector: Globalization Challenges . . . . . . . . . . . 181Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 181Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181The Operating Framework . . . . . . . . . . . . . . . . . . . . . . 182The Legal Setting . . . . . . . . . . . . . . . . . . . . . . . . . . . 182The Corporate Setting . . . . . . . . . . . . . . . . . . . . . . . . . 184The Economic Setting . . . . . . . . . . . . . . . . . . . . . . . . . 185Government National Strategy for Industry . . . . . . . . . . . . . . 187

x Contents

Foreign Participation . . . . . . . . . . . . . . . . . . . . . . . . . 188The Small and Medium Enterprises – SMEs . . . . . . . . . . . . . 190

SME Model for Growth . . . . . . . . . . . . . . . . . . . . . . 194Saudi Family Businesses . . . . . . . . . . . . . . . . . . . . . . . 196Saudi Women and the National Economy . . . . . . . . . . . . . . 200

Estimating the Size of Saudi Women’s Investments . . . . . . . . 202Government and Business Relations in Saudi Arabia . . . . . . . . 205Promoting Private Sector Self-Sustained Growth . . . . . . . . . . . 210Looking Ahead: A Model for Cooperation . . . . . . . . . . . . . . 213Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 214

8 The Energy Sector . . . . . . . . . . . . . . . . . . . . . . . . . . 217Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 217Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217Oil-Based Economies: A Theoretical Analysis . . . . . . . . . . . . 218

The Saudi Petroleum Sector . . . . . . . . . . . . . . . . . . . . 219The Opportunity Cost of Maintaining Spare Capacity . . . . . . . 223“Oil Peak” Debates: Sooner or Later? . . . . . . . . . . . . . . . 223

Saudi Arabia, OPEC and “Fair” Pricing . . . . . . . . . . . . . . . 225Saudi Oil Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230Dilemma of High and Low Prices . . . . . . . . . . . . . . . . . . 233Oil and Saudi GDP Contribution . . . . . . . . . . . . . . . . . . . 237Maintaining the Far East Pricing Premium . . . . . . . . . . . . . . 239A New Energy Star: The Gas Sector . . . . . . . . . . . . . . . . . 241Foreign Interest in Gas Projects . . . . . . . . . . . . . . . . . . . . 242

New Partners Step In . . . . . . . . . . . . . . . . . . . . . . . . 243Outlook for Saudi Gas Sector . . . . . . . . . . . . . . . . . . . . . 244Petrochemicals: Adding Value . . . . . . . . . . . . . . . . . . . . 245Generating Secondary Industries . . . . . . . . . . . . . . . . . . . 247Future Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . 248The Mining Sector: A Hidden Gem . . . . . . . . . . . . . . . . . . 249

Establishing a Model for Mining Cooperation . . . . . . . . . . . 252The Challenge of Alternative Energy . . . . . . . . . . . . . . . . . 252Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 255

Part V The Foreign Sector

9 Foreign Trade: Changing Composition and Direction . . . . . . 259Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 259Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259The Causes of Trade . . . . . . . . . . . . . . . . . . . . . . . . . 260Saudi Industrial and Export Strategy . . . . . . . . . . . . . . . . . 263Saudi Arabia’s Trading Patterns: Exports . . . . . . . . . . . . . . . 265Import Diversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267Origins of Imports Are Changing . . . . . . . . . . . . . . . . . . . 269

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The Export Sector: Oil Is Still King . . . . . . . . . . . . . . . . . 271Asian Exports Predominate . . . . . . . . . . . . . . . . . . . . . . 272Efficiency and Competitiveness . . . . . . . . . . . . . . . . . . . . 273

Achieving Competitiveness . . . . . . . . . . . . . . . . . . . . 275Saudi Competitiveness Performance . . . . . . . . . . . . . . . . 276Reducing Competitiveness Obstacles . . . . . . . . . . . . . . . 279Saudi Arabia’s Competitive Advantages . . . . . . . . . . . . . . 280

Foreign Sector Trade Development . . . . . . . . . . . . . . . . . . 282Direct Assistance for Exporting Firms . . . . . . . . . . . . . . . 282Assist All Sizes of Firms to Export . . . . . . . . . . . . . . . . 283Establish Institutional Development Programmes . . . . . . . . . 283Develop International Trade in Services . . . . . . . . . . . . . . 284Adopt Best Practices . . . . . . . . . . . . . . . . . . . . . . . . 284

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 286

10 Saudi Arabia and the WTO . . . . . . . . . . . . . . . . . . . . . 289Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 289Key Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289Globalization: The Theoretical Arguments . . . . . . . . . . . . . . 290Benefits and Costs of Trade Liberalization . . . . . . . . . . . . . . 293The World Trade Organization . . . . . . . . . . . . . . . . . . . . 293

Historical Overview of GATT and WTO . . . . . . . . . . . . . . 295What Next for the WTO? . . . . . . . . . . . . . . . . . . . . . . 298

Saudi Arabia’s WTO Accession: A Long and Hard Road . . . . . . 299The WTO Agreements: Implications for Saudi Industry . . . . . . 301

WTO and Dispute Settlement . . . . . . . . . . . . . . . . . . . . . 312The Hydrocarbon Sector and WTO Accession . . . . . . . . . . . . 313WTO and “Saudization” . . . . . . . . . . . . . . . . . . . . . . . 316The WTO and Saudi Legal System . . . . . . . . . . . . . . . . . . 317Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 320

Part VI Key Challenges

11 Privatization and Foreign Direct Investment . . . . . . . . . . . 323Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 323Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323Taking the First Steps for Privatization . . . . . . . . . . . . . . . . 324Privatization: Key Concepts . . . . . . . . . . . . . . . . . . . . . . 325Routes to Privatization . . . . . . . . . . . . . . . . . . . . . . . . 327Saudi Arabia’s Basic Privatization Objectives . . . . . . . . . . . . 329Privatization Efforts by Sector: Mixed Results . . . . . . . . . . . . 330Obstacles to Privatization . . . . . . . . . . . . . . . . . . . . . . . 336Foreign Direct Investment (FDI): Theoretical Basis . . . . . . . . . 338Saudi FDI: Establishing the Operational Framework . . . . . . . . . 339

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Saudi FDI: A Score Sheet . . . . . . . . . . . . . . . . . . . . . . . 342Saudi FDI Flows: On the Rise . . . . . . . . . . . . . . . . . . . . 342Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 349

12 Population and Demographics: Saudization and theLabour Market . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 351Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351Population and Demographics . . . . . . . . . . . . . . . . . . . . 352Human Resources and Employment: Theoretical Analysis . . . . . . 355Structure of the Saudi Labour Market and Trends . . . . . . . . . . 356The “Duality” of the Saudi Wage Market . . . . . . . . . . . . . . . 361Saudization: A Viable Solution? . . . . . . . . . . . . . . . . . . . 363

Saudization: Government Measures and Responses . . . . . . . . 366Private Sector Saudization Issues . . . . . . . . . . . . . . . . . 368

Regulating Foreign Labour . . . . . . . . . . . . . . . . . . . . . . 369An “Incentive-Based” Saudization Strategy . . . . . . . . . . . . . 373Labour Participation – A Model for New Entrants . . . . . . . . . . 375Saudi Unemployment . . . . . . . . . . . . . . . . . . . . . . . . . 377Increasing the Labour Participation Rate: Oil Boom “Baby Boomers” 379Education and Labour Participation Levels . . . . . . . . . . . . . . 381

“Educated” Unemployed . . . . . . . . . . . . . . . . . . . . . . 382Controlling the Public Sector “Free Ride” . . . . . . . . . . . . . . 383Female Labour Participation . . . . . . . . . . . . . . . . . . . . . 386Counting the Cost of Unemployment . . . . . . . . . . . . . . . . . 389Saudi Labour Model: Unique to Saudi Arabia? . . . . . . . . . . . . 390Conclusion: Expectations, Realism and Adaptation . . . . . . . . . 391Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 393

13 Education: A Tool for a Knowledge-Based Economy . . . . . . . 395Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 395Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 395Meeting the Globalization Challenges . . . . . . . . . . . . . . . . 396Education in Saudi Arabia . . . . . . . . . . . . . . . . . . . . . . 398The Saudi Educational Structure . . . . . . . . . . . . . . . . . . . 405Saudi Education and Employment . . . . . . . . . . . . . . . . . . 411Restructuring the Saudi Education System . . . . . . . . . . . . . . 414Looking Towards the Future . . . . . . . . . . . . . . . . . . . . . 416In Pursuit of Academic Excellence: EstablishingWorld-Class Universities . . . . . . . . . . . . . . . . . . . . . . . 418KAUST: A New Saudi Education Paradigm . . . . . . . . . . . . . 423Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 427Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 427

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14 Saudi Arabia’s Global Relations: GCC and Beyond . . . . . . . 429Learning Outcomes . . . . . . . . . . . . . . . . . . . . . . . . . . 429Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429The Rationale for Regional Blocks . . . . . . . . . . . . . . . . . . 430The First Milestone: The GCC . . . . . . . . . . . . . . . . . . . . 430

States of the GCC: The Setting . . . . . . . . . . . . . . . . . . . 432The GCC in a “Snapshot” . . . . . . . . . . . . . . . . . . . . . 434

Economic Diversification and Economic Integration . . . . . . . . . 437Diversifying the Economic Base . . . . . . . . . . . . . . . . . . 442

The GCC Financial Sector: Surviving the Global Turmoil . . . . . . 445The Regulatory Framework . . . . . . . . . . . . . . . . . . . . . . 448Development of Offshore and Islamic Banking . . . . . . . . . . . . 452The GCC Capital Markets . . . . . . . . . . . . . . . . . . . . . . 454GCC Trade: Non-Regional Bound . . . . . . . . . . . . . . . . . . 459GCC Demographics and the Labour Market . . . . . . . . . . . . . 461GCC Monetary Union: A Long and Hard Road . . . . . . . . . . . 464To Peg or Not to Peg against the Dollar? . . . . . . . . . . . . . . . 467Thinking West but Moving East: Saudi Arabia’s NewStrategic Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . 470Energy Security at the Heart of Asian Relationships . . . . . . . . . 471Saudi–Indian Relations: Technology and Trade . . . . . . . . . . . 474Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 474Summary of Key Points . . . . . . . . . . . . . . . . . . . . . . . . 475

Part VII Conclusion

15 The Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . . . 479So Rich and Yet So Poor . . . . . . . . . . . . . . . . . . . . . . . 479Managing Expectations and Reforms . . . . . . . . . . . . . . . . . 480Social Cohesion and Poverty Reduction . . . . . . . . . . . . . . . 482The Challenges Ahead . . . . . . . . . . . . . . . . . . . . . . . . 483Regional and International Relations . . . . . . . . . . . . . . . . . 484Education: Quality, Not Quantity . . . . . . . . . . . . . . . . . . . 485Women’s Issues Will Be Important . . . . . . . . . . . . . . . . . . 486Stake in Society . . . . . . . . . . . . . . . . . . . . . . . . . . . . 487

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 489

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 505

Preface

The Saudi Arabian economy continues to evolve, driven by a palpable faster pace ofeconomic and social reforms than at any other period since the Kingdom’s establish-ment. Unlike earlier periods, when the decision to adapt and change was regardedas a luxury that could be accepted or delayed, the current pace of modernizationand reforms has been thrust upon the Kingdom as a strategic necessity driven byglobalization pressures and a willing political choice.

Since the first edition of this book in 2005, the characteristic of the Saudi econ-omy has continued to change structurally. The social engineering that has also takenplace has been no less significant in the field of education, opening up to the widerworld and demonstrating a willingness to address pressing social issues which hadhitherto been taboo or ignored.

Saudi Arabia’s international economic standing has increased over the past fewyears and once again the Kingdom has demonstrated that, in the final analysis, itremains the global energy warehouse that is willing to play a moderating role tothe benefit of both consumers and producers. The Kingdom is aware of the shift inglobal economic power and has embarked on forging its own independent, strategiceconomic and political relations with the BRIC economies – Brazil, Russia, Indiaand China – particularly with China, which is now Saudi Arabia’s second mostimportant trading partner and a source of future strategic cooperation.

As this book highlights, the Kingdom is still having to diversify its economy fastenough to provide employment opportunities for its growing number of young edu-cated citizens and ensure that the legal, educational and social reforms undertakentake root and are accepted by society at large. How this evolves will no doubt affectthe economic well-being of many nations far away from Saudi Arabia’s shores aswell as the livelihood of a large number of foreign workers who call Saudi Arabiatheir home.

Dhahran, Saudi Arabia M.A. Ramady2010

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Acknowledgements

Any book is a reflection of what others have contributed as accumulated knowledgebefore it, as well as the support given to the author by the many whose adviceand suggestions have hopefully been incorporated in the final work. My gratefulthanks go to His Excellency Dr. Khaled Al Sultan, Rector, King Fahd University ofPetroleum and Minerals, and to the Dean and colleagues at the College of IndustrialManagement, and those at the Department of Finance and Economics for theirconstructive comments and suggestions. I appreciate their willingness to act as avaluable sounding board for ideas on issues affecting the Saudi economy and societyat large, even when we disagreed.

Many thanks also go to the many friends and associates over the years in thebanking, media, private and government sectors and who provided moral support,insightful comments and sharp wit when they were most needed. With apologiesto all those not mentioned, my special thanks go to His Royal Highness PrinceTurki bin Abdullah bin Abdulaziz, HE Dr. Ibrahim Al Assaf, HE Dr. Khaled AlAngari, HE Abdullah Al Hussayain, HE Dr. Mohammed Al Jasser, Sheikh HamadSaud Al Sayyari, HE Dr. Abdulrahman Al Tuwaijri, HE Mr. Fehied AlShareef,HE Mr. Solaiman Al Hummayed, HE Dr. Bandar Al Aiban, HE Khaled Al Falih,Dr. Abdulaziz Al-Dukhayil, Abdulaziz Al Hashimi, Abdullateef Al Othman, JamalAl Rammah, Motassem Al Ma’ashouq, Waleed Somali, Loai Mushaikh, WaleedAbal Khail, Abdulaziz Alayaaf, Abdulmohsen Al Saleh, Soliman Al Guwaiz andMohammed Al Mansour.

From outside the Kingdom, my thanks to John Varley, Omar Selim, KarimZahmoul, Ayman Sejiny, Dr. Thorsten Polleit, John Milne, Dr. Noel Brehoney,Gavin Shreeve, Dr. Robert Walker, Shaukat Aziz and Kevin Muehring.

Following in the tradition set for the first edition, I wish to recognize some of themany talented KFUPM students whom I have taught and in whose hands the futureof the Kingdom lies as it moves forward to meet future challenges. They are RashedAl Rashed, Majed Al Ahmad, Maan Nagadi, Hatem Tariq Jamal, Mazen Al Furaih,Nayef Al Athel, Abdullah Asiri, Tareq Qahtani, Khaled Al Moajil, Mohammed binSaud bin Naif, Abdullah Al Dubaib, Bilal Choudhary, Khaled bin Saud bin AbdullahAl Faisal, Tawfiq Al Ibrahim, Rakan Al Otaishan, Abdulaziz Saja, Mohammed AlGuwaiz, Ahmad Baiyat, Abdelrahman Al Hussayain, Saud Al Moammar, KhaledAl Omran, Mohammed Al Modhayan, Fahad Al Farsy, Youssef Al Ibrahim, Tallal

xvii

xviii Acknowledgements

Al Sulaim, Mohammed Yousef Al Dossary, Ibrahim Boumarah, Abdullah Al Waily,Fahad Al Saleh, Fahad Al Humaidah, Mohannad Al Alsheikh, Sh. Nasser Al Thani,Ayman Al Sayyari, Abdulrahman Al Hammad, Turki Al Jammaz, Abdullah Al-Towaijri and Mansour Al Akeel.

A special word of thanks and appreciation is due to the tireless efforts of thededicated technical and secretarial staff, foremost among them Junaid Akthar.

Needless to say, I take full responsibility for any shortcomings and errors.Finally I would like to acknowledge the support provided by KFUPM under

project Number IN 100014 in the preparation of this book.

Abbreviations

AACSB Association to Advance Collegiate School of BusinessAAOIFI Accounting and Auditing Organization for Islamic Financial

InstitutionsABET Accreditation Board for Engineering and TechnologyACH Automated Clearing HouseAMF Arab Monetary FundASEAN Association of South East Asian NationsBear market Falling market pricesBIS Bank for International Settlement, Basle, SwitzerlandBOO Build Operate OwnBOOT Build Operate Own TransferBOP Balance of PaymentBOT Build Operate TransferBull market Rising market pricesCAFTA Central American Free Trade AgreementCDS Central Department of Statisticsceteris paribus Assuming everything else is equalCIS Commonwealth of Independent StatesCMA Capital Market AuthorityCPO Central Planning OrganizationCRR Cash Reserve RatioCSCCI Council of Saudi Chambers of Commerce and IndustryDownstream Processing of gas and oil for final product deliveryEC European CommunityEEC European Economic CommunityEFTA European Free Trade AreaEmir RulerEPCCI Eastern Province Chamber of Commerce and IndustryESIS Electronic Share Information SystemEU European UnionFATF Financial Action Task ForceFDI Foreign Direct InvestmentFed (The) Federal Reserve Bank, USA

xix

xx Abbreviations

FRNs Floating Rate NotesFTA Free Trade AgreementGAFTA Greater Arab Free Trade AreaGATS General Agreement on Trade in ServicesGATT General Agreement on Tariffs and TradeGCC Gulf Cooperation CouncilGDBs Government Development BondsGDP Gross Domestic ProductGFCF Gross Fixed Capital FormationGNP Gross National ProductGOSI General Organization for Social InsuranceHajj Annual Muslim pilgrimage to MakkahHallal permissible in IslamHaram forbidden in IslamICT Information and Communication TechnologyIDB Islamic Development BankIMF International Monetary FundIOC International Oil CompaniesIPO Initial Public OfferingIqama Saudi residence permit for foreignersIT Information TechnologyJIBOR Jeddah Interbank Offer RateKAAU King Abdulaziz UniversityKafeel Saudi sponsor of foreign labourKFU King Faisal UniversityKFUPM King Fahd University of Petroleum and MineralsKSA Kingdom of Saudi ArabiaKSU King Saud UniversityLDCs Least-Developed CountriesLIBOR London Interbank Offer RateMaaden Saudi Arabian Mining CompanyMajls Al-Shoura National Consultative Assembly or Councilmbd million barrels per dayMENA Middle East and North AfricaMMBtu One million British thermal unitsMoF Ministry of FinanceMoP Ministry of PlanningNAFTA North American Free Trade AgreementNCB National Commercial BankNCCI National Company for Cooperative InsuranceNEER Nominal Effective Exchange RateNGL Natural Gas Liquid (or sometimes NLG)NIEs Newly Industrialized EconomiesOBU Offshore Banking UnitOECD Organisation for Economic Co-operation and Development

Abbreviations xxi

OEEC Organization for European Economic CooperationOIC Organization of Islamic ConferenceOPEC Organization of Petroleum Exporting CountriesORR Official Repurchase RatePIF Public Investment FundPPP Public Private PartnershipR&D Research and developmentRamadan Muslim month of fastingREDEF Real Estate Development FundREER Real Effective Exchange RateRepo Repurchase agreementReverse Repo Reverse repurchase agreementRiba Usury interestSAAB Saudi Arabian Agricultural BankSABIC Saudi Arabian Basic Industries CompanySADC Southern African Development CommunitySAGIA Saudi Arabia General Investment AuthoritySAMA Saudi Arabian Monetary AgencySAMBA Saudi American Bank (until October 2004)SARIE Saudi Riyal Interbank Express systemSASO Saudi Arabian Standards OrganizationSaudia Saudi Arabian airlinesSCB Saudi Credit BankSCCI Saudi Chambers of Commerce and IndustrySDR Special Drawing RightSEC Security and Exchange CommissionSEP Saudi Export ProgrammeSFD Saudi Fund for DevelopmentSh. SheikhShariah Islamic lawSIBOR Saudi Interbank Offer RateSIDF Saudi Industrial Development FundSIMAH Saudi Credit BureauSIST Saudi Individual Stock TradersSLR Statutory Liquidity RatioSMEs Small- and Medium-Sized EnterprisesSPAN Saudi Payment NetworkSPRA Saudi Pension and Retirement AgencySR Saudi RiyalStatus quo Keeping things unchangedSTC Saudi Telecom CompanySunnah Sayings of the Prophet Muhammad (pbuh)SWCC Saline Water Conversion CorporationTADAWUL Electronic share trading and information systemTakaful Ta’awni Islamic cooperative life insurance product

xxii Abbreviations

TASI TADAWUL All Share IndexT-Bills Treasury billsTCF Trillion Cubic Feet (of gas)UNCTAD United Nations conference on Trade and DevelopmentUNDP United Nations Development ProgrammeUpstream Production of oil and gas from wellsWakeel Saudi commercial agent of foreign companiesWasta connection, favourWTO World Trade Organization